Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 198

Three drivers of attractive infrastructure opportunities

Infrastructure has become a hot topic in recent months. Donald Trump has promised a US$1 trillion infrastructure investment programme, while in Indonesia immediately to our north, the Joko Widodo administration has committed to a doubling of infrastructure spending in 2017 compared with 2014.

Locally, the national political debate is escalating on the adequacy of South Australian and east coast electricity generation capacity, and how we might meet any shortfall. The latest plan from Prime Minister Malcolm Turnbull explores a $2 billion expansion of the Snowy Hydro Scheme.

Increased investment in infrastructure is long overdue. This is true in both developed and emerging economies, and has become increasingly acute over the past 30 to 40 years. In the United States, for example, the recently released 2017 Infrastructure Report Card from the American Society of Civil Engineers (ASCE) gave America’s infrastructure an overall score of D+, stating:

“… our nation is at a crossroads. Deteriorating infrastructure is impeding our ability to compete in the thriving global economy, and improvements are necessary to ensure our country is built for the future”.

ASCE estimates US$4.6 trillion is needed in US infrastructure investment between now and 2025, of which they estimate approximately US$2.5 trillion is funded, leaving a massive funding gap.

The main factors driving the need for investment

Three main factors drive the escalating need for infrastructure investment around the world:

1. Long-term chronic underspend

A 2015 study by the B20 (the business arm of the G20) estimated that by 2030 approximately US$60-70 trillion will need to be spent on infrastructure around the world just to keep up with demand. It believes only US$45 trillion will be funded, leaving a gap of US$15-20 trillion.

This spend is largely to bring existing assets up to standard and keep pace with growth, and would offer little expansion in the infrastructure stock.

2. A growing middle class, especially in emerging economies

The growth of a substantial middle class in emerging markets will demand not only more but better infrastructure to complement their improved living standards and increased disposable income.

3. Governments with limited funding capacity

Historically governments have been the primary provider of national infrastructure. However, in the post-GFC world, many governments are running substantial fiscal deficits and have fragile, highly geared, national balance sheets. Their ability to invest in public sector infrastructure is highly constrained. In fact, the demand to improve infrastructure comes at a time when governments’ funding ability is at its weakest in a longtime.

Enter the private investor

Infrastructure assets possess a number of attractive investment characteristics including:

  • long dated, resilient and visible cash flows
  • regulated or contracted earnings streams
  • monopolistic market position or high barriers to entry
  • attractive potential yield
  • inflation hedge within the business
  • low maintenance capital spend
  • largely fixed operating cost base
  • low volatility of earnings.

These characteristics are ideally suited to both the listed and unlisted infrastructure markets where the quality and predictability of earnings are highly valued. The public, or listed, market also offers liquidity which allows entry into or exit from an investment more easily than in the unlisted market.

A current example in NSW is the State Government privatising its electricity assets with the proceeds to be recycled into new infrastructure investment. The Government is entering long-term leases of the energy businesses Transgrid, Ausgrid and Endeavour. The major purchasers of these assets have been superannuation and unlisted infrastructure funds, with some involvement from listed market investors.

Given the popularity of infrastructure assets amongst unlisted investors, demand currently far outstrips supply, meaning that investors in an unlisted fund can be waiting on the sidelines for some time before a suitable asset is secured by their fund, and their cash deployed for investment.

Regulated v user-pay assets

An important definition in the world of infrastructure investing is the distinction between regulated and user-pay assets.

Regulated assets are the typical essential service utility such as gas, electricity and water companies. Given the natural monopoly position they enjoy, a free market economy will typically ‘regulate’ the returns they can earn and rates they charge customers.

In contrast, user-pay assets, such as airports, ports and toll roads, typically operate under the governance of a ‘concession deed’ with a government authority. It is this deed that determines the scope and scale of the business emanating from it.

This distinction offers a different investment profile. In the current environment of strong global growth, user-pay assets should do relatively better as they are better positioned to immediately benefit from increased demand and pass through any inflationary pressures. Alternatively, in an environment of sluggish global growth and falling interest rates, regulated utilities would be preferred as their defensive, safe haven characteristics become more highly valued by investors.

The global listed infrastructure market will grow rapidly over coming decades, along with its unlisted cousin. Public equity markets will form a crucial component in the funding solution for how the world meets its acute and rapidly growing infrastructure needs.

 

Greg Goodsell is Global Equity Strategist at 4D Infrastructure, a Bennelong boutique. This article is general information that does not consider the circumstances of any individual.


 

Leave a Comment:

banner

Most viewed in recent weeks

2024/25 super thresholds – key changes and implications

The ATO has released all the superannuation rates and thresholds that will apply from 1 July 2024. Here's what’s changing and what’s not, and some key considerations and opportunities in the lead up to 30 June and beyond.

Five months on from cancer diagnosis

Life has radically shifted with my brain cancer, and I don’t know if it will ever be the same again. After decades of writing and a dozen years with Firstlinks, I still want to contribute, but exactly how and when I do that is unclear.

Is Australia ready for its population growth over the next decade?

Australia will have 3.7 million more people in a decade's time, though the growth won't be evenly distributed. Over 85s will see the fastest growth, while the number of younger people will barely rise. 

Welcome to Firstlinks Edition 552 with weekend update

Being rich is having a high-paying job and accumulating fancy houses and cars, while being wealthy is owning assets that provide passive income, as well as freedom and flexibility. Knowing the difference can reframe your life.

  • 21 March 2024

Why LICs may be close to bottoming

Investor disgust, consolidation, de-listings, price discounts, activist investors entering - it’s what typically happens at business cycle troughs, and it’s happening to LICs now. That may present a potential opportunity.

The public servants demanding $3m super tax exemption

The $3 million super tax will capture retired, and soon to retire, public servants and politicians who are members of defined benefit superannuation schemes. Lobbying efforts for exemptions to the tax are intensifying.

Latest Updates

Retirement

Uncomfortable truths: The real cost of living in retirement

How useful are the retirement savings and spending targets put out by various groups such as ASFA? Not very, and it's reducing the ability of ordinary retirees to fully understand their retirement income options.

Shares

On the virtue of owning wonderful businesses like CBA

The US market has pummelled Australia's over the past 16 years and for good reason: it has some incredible businesses. Australia does too, but if you want to enjoy US-type returns, you need to know where to look.

Investment strategies

Why bank hybrids are being priced at a premium

As long as the banks have no desire to pay up for term deposit funding - which looks likely for a while yet - investors will continue to pay a premium for the higher yielding, but riskier hybrid instrument.

Investment strategies

The Magnificent Seven's dominance poses ever-growing risks

The rise of the Magnificent Seven and their large weighting in US indices has led to debate about concentration risk in markets. Whatever your view, the crowding into these stocks poses several challenges for global investors.

Strategy

Wealth is more than a number

Money can bolster our joy in real ways. However, if we relentlessly chase wealth at the expense of other facets of well-being, history and science both teach us that it will lead to a hollowing out of life.

The copper bull market may have years to run

The copper market is barrelling towards a significant deficit and price surge over the next few decades that investors should not discount when looking at the potential for artificial intelligence and renewable energy.

Property

Global REITs are on sale

Global REITs have been out of favour for some time. While office remains a concern, the rest of the sector is in good shape and offers compelling value, with many REITs trading below underlying asset replacement costs.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.